For physics • For physicists • For all

Working in physics: Success is in the bank

An organization that helps look after the country’s economy may not seem an obvious career choice for a physics graduate, but the Bank of England and physicists have a lot to offer each other, explains Rupert de Vincent-Humphreys.

As the nation’s central bank, the Bank of England is committed to promoting and maintaining monetary and financial stability. Broadly speaking, this means that it sets the interest rate at a level such that the economy should meet the UK government’s 2% inflation target in the medium term, and it analyses the financial system to identify and reduce systemic risks to the country’s financial infrastructure. The Bank also performs several other critical functions, including managing the approximately £42bn worth of banknotes in circulation and managing the nation’s foreign-currency reserves — a multi-currency fund worth some £23bn. As a physicist, I find that I can make a full contribution to this work.

This is not particularly surprising. Since joining the Bank, I have found that the skills at the heart of my physics training have proved entirely invaluable. Aside from the obvious benefits of being mathematically literate, much of the Bank’s work involves observing what’s happening and analysing relevant data within a proper, theoretically rigorous framework, bearing in mind the limits to which those data can be measured precisely, and drawing conclusions and making inferences about what else may happen. All of this will be familiar to physics graduates. Furthermore, you can often find yourself having to explain complicated issues to people who do not necessarily have the same specialist, technical knowledge as yourself.

All about optionsI work in the Bank’s Monetary Instruments and Markets Division, which is one of the departments tasked with producing detailed analysis of what is happening in the economy for the Monetary Policy Committee (MPC), the body which sets interest rates, and briefing it ahead of its monthly rate-setting meeting. It is the job of my division to assess information about the prospects for UK economic growth and inflation based on the financial markets. The way that the prices of different financial assets react to different economic shocks can reveal information about the nature of that shock, and this information can help the MPC to determine the appropriate monetary-policy response.

Much of my time, therefore, is spent analysing the prices of financial derivatives. These are assets the value of which depend on the price of another asset, often in a non-linear way. “Options” are one such derivative — they provide the holder with the right to buy (or sell) an asset (e.g. a share in a company, or a whole stock-market index like the FTSE 100) at a pre-specified price on a particular date in the future. When that date arrives, it would only make sense to exercise that right to buy (or sell) if the open-market value of the underlying asset is above (or below) the pre-specified price.

Options to buy the FTSE 100, for example, are available for a whole range of pre-specified prices, and from the way that the cost of this type of option varies with the price you specify, one can deduce the whole probability distribution assumed to describe the value of the FTSE 100 at that future date. This is important, because it can tell us about both the option market’s assessment of the risks to the FTSE 100 and its attitude towards those risks. Incidentally, the names of physicists can be found throughout much of the core literature in this area. Richard Feynman, for instance, played a leading role in the probabilistic representation of the option-pricing partial differential equations.

On a day-to-day basis this means that I often find myself communicating my work with others — everything from chatting with peers about how they can make better use of my output to enhance their own work to producing formal written responses to questions from members of the MPC. Alternatively, I may be spending time on longer-term research work, for example separating investors’ real expectations for future prices from their attitude towards holding risky assets; or further developing the computer programs that the division uses for routine analysis.

Sense of purposeI first became involved with the Bank while I was doing my undergraduate physics degree at the University of Durham. In 2002, just before commencing my final year, I took part in its undergraduate internship scheme, which comprised an eight-week paid summer placement. As an undergraduate intern, your time is spent on a self-contained project that is of real importance to a particular business area. My project, for example, looked at the extent to which certain trading behaviour in one segment of the money market might influence other areas. After completing my placement I was offered a graduate job with the Bank, which I took up in 2003.

Summer internships are an excellent way to get to know an employer, because you can learn about both what they do and what it is like to work there. It is easy to read up on what a firm does, but to get a good feel for how much you would enjoy being part of it takes time. The Bank prides itself on its working environment and the opportunities that it offers its staff. Indeed, the emphasis on the continuing professional development of its staff was one of the key features that attracted me to the Bank in first place.

This extends well beyond specific job-based training and soft skills to include more substantive offerings such as a year’s leave to take a postgraduate degree, complete with funding for both tuition fees and living expenses. The Bank exists to support monetary stability and financial stability, not to maximize shareholder profit, and that deeper sense of purpose fosters an intensely co-operative work ethic. For me, doing interesting and challenging work that applies scientific thinking to a business environment and working with friendly and supportive colleagues is a combination that cannot be beaten.